Dealing with China

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“DSC_0844” by Studio5Graphics is licensed under CC BY-NC-ND 2.0

Relations with China are important.  By some measures the Chinese economy is already the biggest in the world and still growing rapidly.  The Chinese military is the most comprehensive challenge to US hegemony since the heydays of the USSR.  Chinese technology has evolved rapidly to near parity with ours.   The Chinese political system could not be more diametrically opposed to ours.

With such a significant adversary, it goes without saying that we need to manage the relationship carefully.  At the moment, though, all we’ve got is war-mongering.  The Trump people have always been big on scapegoats, and the Chinese are just as convenient as the immigrants.  A difference is that immigrants have some defenders—Trump can’t get away with just calling them all animals.  But by playing patriot, Trump has gotten away with pretty well anything about the evil Chinese.

A couple of comments:

– Since the Chinese were major allies in recovering from the 2008 crash—and the Republican Party was not—there’s a strong case that Republicans (deliberately) caused more pain to the US economy than the Chinese did.

– The Chinese intellectual property theft we keep hearing about had been diminishing until Trump ignited his trade war, and Chinese hardliners felt empowered to fight back.

Competition with China is a fact of life.  No amount of trade war is going to make them go away.   So “getting tough with the Chinese” is publicity not policy.  What matters is how to get results, as we’ll discuss.  Further, it should be recognized that we actually have quite a lot of influence on the form our relationship will take.

We’ll start with some background.

  1. Political and economic systems.

China is very unfree.  There is extreme control of information available internally, and consequences for speaking outside the party line can be very severe.  Recently deployed surveillance systems add another dimension of party control.

Before we get too far up on our high horse, though, we should recognize that support for the regime in the population is now very strong, perhaps stronger than ever.  The regime has delivered unimaginable economic success for a very wide swath of the population.  Just to be clear this wasn’t stolen from us—US trade is a small part of the overall Chinese economy—it is a legitimate success.  And it created a sense of pride in China that had been lost for centuries.

There were two primary factors for that success, one intentional and the other not.  The intentional part was government investment in the population (e.g. education) and national infrastructure.  That prepared the country for technological achievements that would have been impossible otherwise.  In that, China was very much like the US in the fifties—when the government sent the GI’s to college and built the interstate highway system.  Public investments we’ve forgotten how to do.

The other success factor—strangely enough—was an accidental surge of free enterprise.  As a minor weakening of collective economic control, Chinese municipalities were freed to carry out their own businesses once obligations to the state had been met.  That minor bit of freedom took over the economy.  Municipal businesses became dominant to the point that they dwarfed the (corrupt) state-run enterprises.  Municipalities ended up devoting all attention to their own businesses, to the point that they were meeting their obligations to the state with products purchased by free-market profits!

So China’s success was as a mixed market economy.  Where Xi’s new stress on state enterprises will take them remains to be seen, but it certainly raises questions.  In many ways Xi’s push to consolidate power in the state is just as radical as Trump’s push to turn everything in the US over to the private sector.  Both are abandoning past recipes for success to cults of personality and personal ideological visions.

  1. History, nationalism, and negotiation

Western imperialism in China was terrible and recent.  The Opium Wars were fought for the profits from addicting the population, and it took Mao’s hell to drag the country out of the consequences.  While the Europeans were primary players, we had a role in it too.  We have conveniently forgotten all of that, but the Chinese most emphatically have not.  Not just their leaders but the population as a whole has reason to see their current place in the sun as hard-won against forces that have done their best to keep them down.

That’s a dangerous situation.  It sounds like Germany in the 1930’s (eerily, that’s also the only other example that comes to mind of such a dramatic economic recovery).  From that example we know what doesn’t work: neither draconian efforts to keep them down nor appeasement after the fact is going to be successful.

In that context our unilateral trade wars have several bad effects:

– They complicate negotiations by mixing fair trade with measures to retain dominance.  In that the trade wars are counterproductive even domestically, by encouraging the false belief that we can “defeat” Chinese competition.

– They make negotiation a matter of pride not just interest.  Worse, they produce broader nationalist reactions in both countries.

– They lead to more destructive isolation of countries from each other, always a bad idea.

The only path that works is to make them part of the world economic order.  That such approaches work is the primary lesson from the changed world order after the second world war.  The point was discussed recently in a piece by former leaders of ten disparate countries.  The WTO is the means by which rules can be established for free trade as well as conditions of labor and environmental concerns.   As such, it is a much more effective instrument of national policy than the pot shots we’re taking now.

Let’s be very clear that this is not about being nice—it is the path of maximum leverage.  The reason why our current discussions with China are getting nowhere is because we have chosen weakness—replacing leverage by bombast for public consumption.  Under Obama, with far less economic leverage than we have today, both the balance of payments deficit and incidents of intellectual property theft declined markedly.   Both have increased under Trump.

  1. Morality, Chinese minorities, and Hong Kong

There’s a lot we don’t like about the way the current Chinese government does business.  In addition to repression of the population, there is the imprisonment of Uighurs in concentration camps and the heavy-handed suppression of democracy in Hong Kong.

Let’s start with repression of the population.  An important question is why the population is enthusiastically ready to accept that Xi’s model over ours.  Part of it as noted is the economic success and rise in stature of China.  However, another part of it is that—correctly or not—they don’t see the current version of the US as a good argument for our ideals.

The Chinese government may be repressive, but at least they have a proven commitment to improving the economic well-being of the population.  Seen from the outside the US is run for corporations—who can buy elections with impunity—and those corporations have no commitment to anything beyond return for their investors.   Government sees no reason to intervene for the well-being of the population, and the all-pervasive corporate influence leads to a relentless consumerism that dominates daily life.

Where we see in Xi a return to discredited socialist control of the economy, they see in Trump the triumph of corporate power.  It’s up to us to prove them wrong.

Until that happens, our support for the Uighurs is hypocrisy from a country that puts immigrant children in cages and demonizes its own citizens.  Support for political liberalism is strange from a regime than calls the press “enemies of the people”.   And support for democracy in Hong Kong is nothing more than the nth Western effort to keep China down.

That doesn’t mean there’s nothing we can do, but we shouldn’t delude ourselves about the power we really have.  Our actions on Crimea were ultimately little more than symbolic, and we could do nothing at all about Tiananmen Square.  For Hong Kong, the Chinese have already branded the unrest as a Western plot, so overt pressure can be counterproductive.  Just like the US, China is less likely to cave in to coercive power than to international outrage.  For that we need allies and behavior that matches our rhetoric.

 

Where does all that lead?  Here’s one list of conclusions:

– We must bring China into the world economic system with updated rules reflecting today’s reality.  That’s why the WTO exists.  This would have started before now with any other President.  We have a major responsibility to make it happen.

– There are other areas, climate change is an obvious example, where we have a strong need to work together.

– There are also compelling reasons for vigilance, particularly with the military.  But even there we have a large interest in agreements (with Russia too of course) wherever possible.   In particular we all need to avoid arms races and military instability.

– Economic competition with China is inevitable and will be intense.  There is no reason either we or they will be sole winners, as the differences between the societies will lead to different strengths.  That should be good for worldwide prosperity.  The most important thing for us is to recognize and play to our strengths.

– We should (at least for now) view both Xi and Trump as anomalies.  Both are roadblocks to domestic and international progress, and there is no way to know how long they will last.  But they do not define their countries or the possibilities for the future.

– Finally if we’re worried about the decline of our ideals in the world, then we should accept the challenge of living up to them!

Thinking About Manufacturing

There seems to be a lot of confusion about manufacturing.

We’ll start with a few slogans that pass for generally-accepted truth:

  • Manufacturing is the core of the US economic base.
  • Restoring manufacturing is key to the viability of the US working class.
  • The Chinese have gutted manufacturing in the US.
  • The continuing decline of manufacturing is another indication of the failure of Trump’s economic policies.

One indication that something might be fundamentally wrong in all of that comes from looking at trends in the service and manufacturing sectors over the past twenty years:

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To say the least, it looks like there is something more fundamental going on than politics or even globalization.   Manufacturing has been declining relative to services for many years and in a big way.  It’s not just because of China, and it’s not even just in the US:

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The US has been undergoing a massive migration from a manufacturing-oriented economy to a services economy. One problem is that we don’t really have a good vocabulary to talk about that situation.  The term “services” goes from McDonald’s to Google.  But in any case manufacturing is no longer the core of national economic success.  Think about television.  The sets have become so cheap that only huge volumes can cover the low margins.  But every major company you can think of wants to get into content to run on those sets.  There are hardly even any DVD’s manufactured for that stuff anymore!

We’ve talked here before about software.  All of the leading high tech companies (including Apple) are software companies.  Software companies produce product without manufacturing.  And that’s only one of the reasons such companies can be very profitable:

– They typically sit on top of the value chain (or even, like Facebook, have only software as output)

– They tend to have monopoly power (because dominant players can afford to spend more on R&D)

– They tend to have high barriers to entry and effective customer lock-in

The world economy today has increasingly many highly-profitable dominant software companies.  Some like Google produce software; others like Apple rely on a world-wide agglomeration of highly-competitive businesses producing to their specs.  Our current national success is that we have lots of them.  Our military strength depends on their technology.  The Chinese are sensible enough to understand that’s where they want to be too.  Even in biotech—where there has to be manufacturing—you’re still talking about largely high-skilled operations in companies with a large emphasis on R&D.

 

It’s a little strong to say it, but it’s closer to reality than most of what we hear:  mass employment in manufacturing is like mass employment in agriculture—it has had its day.  The migration is as extreme as what happened a hundred years ago.  And we’re better off thinking about the consequences than blaming it all on the Chinese or trying to outdo each other with promises to make it go away.

That point of view is widely held (based on the figures), but somehow it hasn’t managed to penetrate public discussion.  That’s not surprising for the Trump people, since they’ve been making it all up from the beginning.  For the left it’s different.  Traditional socialism has always had an industrial flavor that is hard to give up.  Unions and trust-busting are good, but they won’t bring back the past.  Forcing businesses that take federal research money to do manufacturing here will help some but not enough to reverse the trends.

(For the left, one particular paper has been frequently cited to show manufacturing job loss is reversible.   That paper concluded that the large manufacturing job losses from 2000 to 2010 were not due to automation here.  However, for its purposes it only examined companies that remained here and checked how many robots they had.  Nothing was said about the reasons any single company had left.)

The question then is what we should do.  The key is to start considering what we see around us as reality:

  • A long-term trend of decline in manufacturing
  • Very profitable, highly technical, non-manufacturing monopolies
  • Complete neglect of domestic services for the public good

We’ve talked about those trends here before.  As we’ve noted, some of the monopoly power is structural, so it’s not clear how far we’ll get with breaking them up.  However, monopoly power means companies are far from cost-sensitive, so the last thing we need to give them is more tax breaks.  On the contrary what’s crucial is learning to tax them, and we’ve got Apple as proof of how tough that can be.

In this picture the public sector has two important roles:

  1. Preparing the country for success in the world economy. That means infrastructure of all kinds, including education and child care as much as roads and bridges. The private sector won’t do it.  But—with an appreciation for the role of government derived from the second world war—we used to do a better job of it ourselves.
  2. Making sure the wealth of the monopolies gets translated into benefits for the population. This is another case where the private sector can’t act for its own good. Henry Ford famously wanted his employees to be able to buy his cars, but that’s certainly not the ethos of today. This doesn’t mean free money, it means employing people for the unfilled tasks needed for the public good.

We need the public sector to be the means of addressing the country’s unmet needs with resources from gilded-age inequality.

It’s worth pointing out that we have been wasting resources on a spectacular scale.  Under George W. Bush we fought a $3T war with no identifiable benefit and underwent a privatization effort (including tax cuts) that ultimately produced a near-depression.   Under Obama the Republican Congress shut down government, retarding recovery and preventing the public sector from doing any of the jobs just described.  Under Trump the primary achievement has been another $2T of tax cuts, with a jump in inequality and a deficit big enough to prevent any of the infrastructure work from getting done.  That the tax cuts went straight into stock buybacks is a clear indication of irrelevance.

It is instructive to think back to the time when the country underwent the last such a drastic economic change, when we went from an agrarian to an industrial society.   People had a hard time then thinking about it.  They got tied up in an irrelevancy—the silver monetary standard—and it took a long time before the real problems of corporate power and inequality were addressed.  A contemporary Henry Demarest Lloyd expressed his frustration this way: “The free silver movement is a fake. Free silver is the cow-bird of the reform movement. It waited until the nest had been built by the sacrifices and labor of others, and then it lay its own eggs in it, pushing out the others which lie smashed on the ground.”

We have something of that problem today.  The long-standing decline in manufacturing is a continuing but unacknowledged reality.  Instead we spend our time blaming it on the immigrants, or the Chinese, or the elites, or some combination of everyone else.  Until the blame game stops we can’t begin to decide how our economy really needs to work in the world we’ve got.  For climate actions we worry about coal miners, but there are many others in the same boat.  There is an international aspect too:  we’re too busy looking for villains to spend time on making the system work for global prosperity.

For our part we think it’s time for the public sector to come in from the cold.   In any case it’s time to stop talking about free silver.

 

 

 

Some Points on Climate

This touches a number of recent climate issues—some new, some familiar.

Background

  1. The primary issue for climate change is alternative energy sources.

We’re not repealing the industrial revolution.

This shouldn’t be a partisan or a lifestyle issue

We need good science and the will to fight entrenched special interests

  1. Conservation is important for now but not the main focus

Alternative energy will do the job if we do ours.

Chevy Suburbans are not the issue—we just need to power them differently

 “Respect for nature” by primitive peoples is irrelevant (but coming from all directions!)

  1. This is a fundamentally international problem where what we do for the rest of the world is as important as what we do domestically.  We will need to spend money on parts of the world who can’t.

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  1. The fossil fuel companies have an evil influence on progress, but outrage at what they knew 50 years ago is a distraction.

Oil isn’t unclean—we just went too far with it.

The Carter era thought the world was running out of oil in less than 50 years

               The key issue is influence of fossil fuel companies now.

  1. Conversions of coal power plants to gas are still important—they buy time

We’re up against a carbon budget limit—any saving buys time

Progress is still rapid for alternative energy technologies—even electric cars aren’t ready for everyone yet.

Coal plants, especially new ones, continue to be a problem.

  1. We should stop calling a carbon pricing a tax.

We need to stop the huge fossil fuel subsidy—$1 T per year in the US—that comes from using the atmosphere as a free carbon dump.

We need a plan to make the population whole—and earn the trust we will do it

History and politics

  1. Obama actually did quite a lot for climate

International unanimity (after many years of failure)

A process to do more in the future

Turning China around (look at China’s line on the emissions chart above)

               Seed funding for Tesla and subsidies for electric cars

Note—the US was the primary beneficiary of the Paris Agreement.  We’re not being told to stop emitting at twice the rate of anyone else!

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  1. Trump’s effect on progress is far worse than acknowledged

Reversed progress on all environmental issues in the US

Broke international unanimity—okay for everyone including China, Japan, and Germany to backslide with coal power plants

Legitimized attacks on climate action everywhere (Australia)

Continues to block any international cooperation on any issue

Going forward

  1. The single most important action is to defeat Trump

He is a roadblock to progress by anyone’s definition.

Any of the Democratic candidates would be good—no one has a real plan yet anyway

  1. The Green New Deal delivers a necessary coalition for progress

Makes clear that the new world is a good place to be.

Unites all constituencies

Must eventually add carbon pricing.

Not yet a plan

  1. The youth climate movement is helpful but a little worrisome

Non-partisanship makes it easy to co-opt—speakers at rallies dismiss all establishment parties.

               Trump was (in part) elected by young people who thought voting didn’t matter.

  1. If we can get past Trump, then we all need to get serious about a real plan

consumption-by-source-and-sector

Needs to address our current usage

Make sure it happens–what to fix when and by whom

               Minimize the hurt (particularly for the disadvantaged)

Recognize full international responsibilities

Don’t expect climate efforts to fix everything.  Broader issues include:

Easing workforce disruptions from technology, globalization, etc. (not just from climate)

Education

Infrastructure (much more than climate)

Jobs and wages (unions, minimum wage, role of the public sector)

Racism and sexism (need rules for everywhere)

Inequality overall (need a tax plan)

Other environmental issues will still be there to be solved

Fixing Capitalism

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California Bank” by waltarrrrr is licensed under CC BY-NC-ND 2.0

There’s a lot of talk these days about fixing capitalism.   However, there’s a problem with much of it—there are so many things to fix that it all becomes a daunting task.  The point of view here is simpler.  There are a great many things that aren’t happening, because capitalism just doesn’t do them—and we can start by making sure those get done.

At its source this problem comes from our being force-fed the wildly radical idea that the private sector—capitalism—will solve all problems by itself.  So even when we realize that capitalism needs to be fixed, we tend to be overly concerned with all the patches.

However, even Adam Smith had no delusions about the limitations of capitalism.  As he pointed out:

  1. The private sector will not police itself.

On the contrary it will do everything possible to corrupt the free market with monopolies and government influence: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  We’re used to hearing “private sector” and “free market” used almost as synonyms.   In fact, as Smith recognized, the free market is an ideal that can only be achieved when government holds the private sector accountable.

  1. The private sector will not provide the environment for its own success.

Smith even advocated a government program of universal literacy, quite a stretch for the eighteenth century and a pointer for us today.  This is a serious matter, because it shows how dangerous it is for the economy to punt everything to the private sector.

  1. Much of what is needed for a successful society is simply out of scope for the private sector.

Capitalism will not provide any service where there is no competitive advantage in doing it.  Public health and welfare, environmental questions, basic science, etc. are all out of scope.

Fixing capitalism strictly speaking deals only with the first category.  No amount of fixing is going to make capitalism deal with the rest.  Those issues are ours to solve.

It’s instructive to think about needs in each category.

 

  1. Policing the private sector

Monopolies are still with us and have become an increasing problem due to technology changes and weakened anti-trust enforcement.  The same is also true of corruption due to business influence on government.  These days no one even apologizes for it.

This is particularly true in the financial sector where banking, for example, has evolved into speculative gambling with losses covered by the FDIC.  You can even argue that the financial sector overall has evolved in directions that make it predatory on productive business.  After decades of Republican-inspired hands-off attitudes toward business, there is no shortage of serious issues.  However fixing all of them makes progress look far away.

Taking a step back, there is a single biggest problem:  legal tax evasion.  This is a gating item for so much progress that it just has to be dealt with.  Even before Trump’s tax cuts (and despite nominal tax rates), American companies paid the lowest effective taxes as a percent of income of any developed country.  That was largely a result of multinationals’ ability to move income to tax shelter countries—reducing rates or hiding income entirely.  Apple is only one egregious case.  The recent tax cuts made matters worse with drastically-reduced business rates, arcane rule changes for overseas income, and the new pass-through income treatment.  That pumped up the deficit—thereby hobbling government’s ability to respond to the serious sins of omission in categories 2 & 3.

What’s more, despite the insistent propaganda, taxes are actually not a primary issue for American competitiveness:

– Many studies have shown that in most industries today business profit levels reflect monopoly power to set prices well above historic levels of margin.  That’s a trend we can expect to continue.  In other words, businesses have considerable financial room to pay taxes.

– Further, as frequently noted, the savings from the tax cuts went primarily into stock buybacks.  That is companies decided the best thing to do with the tax cut money was to give it back to their investors in higher stock prices.

Conclusion:   Get the private sector (particularly large multinationals) and its investors to pay taxes.  Then work through all the rest.

 

  1. Providing the environment for economic success

If taxes aren’t the issue for American competitiveness, what is?  As we’ve noted here before, what makes for success is the technological advantage that has kept us in many areas on top of the heap.  That supports both our standard of living and our military strength.

Our technical dominance is based on three factors:

i. The dynamism of our economic system in generating new products and technologies.

ii. Broadly-based government support of research and education

iii. Remaining the preferred destination for entrepreneurs and other ambitious people from everywhere to realize their dreams

Let’s look at the current status of all three:

i. Unchallenged influence of big companies on government has favored established companies over new entrants. In part this is an anti-trust enforcement issue, but it has many other aspects.  The demise of net neutrality is one highly-visible example.

On this issue the interest of big business is strongly opposed to what makes for long-term national success.

ii. The administration is actively hostile toward science, government-sponsored research, and broad-based education. This is shown in purging of scientists from government agencies and restricting their influence on public policy.  One obvious example is in climate change.  Also the new tax law punished major research universities with a targeted tax.

Public investment in research had a major role in the prosperity of the 1950’s and 60’s and kicked off the opportunities of internet today.  The same kind of public investment has remade China as a technology powerhouse.  But our dedication to research has eroded over time:

R_D_spending

Instead we’re waiting for the private sector to do the job, which by definition means catch-up.

The story for education is similar.   In the 1950’s and 60’s we were expanding educational opportunities to whole classes of people who had never before had the chance.   Now we rank far down on the list for upward mobility.  Sudent loan debt tells the same story, and that’s only about the people DID go to college, not about the ones who were deterred by cost and DIDN’T.  Finally, educational funding in the states has never recovered from the 2008 crash.

It’s worth mentioning in passing that the value of research is not only for international competitiveness.  Basic research is part of the global project of raising human standards of living. Even when one worries about national competitiveness, progress is generally so international that openness is the ante for remaining at the forefront of progress.  Current policy to restrict international participation of US scientists weakens the country in the name of national security.

iii.  As a final point we need to emphasize the critical role that foreigners and their children are playing in maintaining our national strengths.  Many studies have shown their role both in starting new companies and in supplying the technical underpinning that makes for success.  As Steve Bannon noted (for his own purposes) such people represent more than half of Silicon Valley activity.  Google (cofounded by a foreigner) and Apple (by the son of a foreigner) are only the most obvious examples.

The current xenophobic backlash is wildly off-target.  Particularly with the weakened support for research and education, those are the people keeping our place in the sun.  (To be clear, an immigration plan that only accepts people with degrees is no counterweight to the nationalist, nativist rhetoric.)

Conclusions:

– This area has got to be fixed or we risk losing our standard of living and dominant role.  These are traditional US values and as important as ever for US success.   It we’re worried about competing with Chinese, this is where the battle will be lost or won.

– If we can get our act together, items i and iii should remain as our advantages going forward.  So we shouldn’t be defeatist about a future that is in our hands.

 

  1. Spending for the common good

This has been a bastard child for so many decades now, that there is much that needs to be caught up.  Here is one short list:

– Infrastructure (Much discussed, but with more sides to it than you might think.  See here for a good overview.)

– Climate change (Evidence has become incontrovertible, but we still need a real plan.)

– Universal health care (Needed not only as a benefit but also as an enabler for equal opportunity.)

– Opioid crisis (Much discussed, but with radically inadequate funding)

– Environmental protection (Not a luxury)

– Transitional assistance (Helping people through changes—from technology, globalization, etc.)

There is enough essential work here to pose a major challenge for government.  We need to confront the unmet needs of the society, then we need concrete plans, and finally we need to manage major operations with competence and integrity.  Despite the propaganda there is nothing unusual about effective, government-sponsored work.  However as with any other enterprises, this needs to be scrupulously well-run.  Just because good people are running it doesn’t mean there is less risk of corruption.  We have to get serious about public enterprise.

That means we have to get past the idea that there is something intrinsically wrong about working for the public good.  That’s after all nothing more than the other side of the “private sector will solve everything” coin.  We live with the continued juxtaposition of vast under-employment (3.7% unemployment doesn’t change the good union jobs replaced by Walmart) together with vast unmet needs that the private sector won’t address.  We’ve got to take the initiative to match one with the other.  This is not “make work”.  It’s essential work that isn’t getting done, because the private sector won’t do it.

Until we take that initiative, it’s hard to assess where we are as a society.  Public enterprise helps in many ways.  It helps with inequality and the middle class.  It helps with leverage for workers and standards for employment.  Many public sector jobs of their nature will be hard to outsource.  It makes no sense to talk about abstractions such as Universal Basic Income until we see how things shake out in a fully-functional economy.  The future may be less strange or scary than it seems.  (This isn’t just about public sector employment; work done by the public sector helps other trends as well.  Even in Silicon Valley each job in tech creates 4.3 other jobs as well.)

Conclusion:   We need to create the full-scale machinery for government service to do what the private sector won’t.

 

It’s always hard to foresee the future.  I remember when I was in high school, Prince Philip gave a commencement address at UCLA in which he spoke (as world expert!) about leisure.  Already then he was thinking that machines would take over work, leaving as us all to spend the rest of our lives at the beach.

That’s certainly not what happened, but there’s still something to be said for the positive spin.  Historically technology and even globalization have been good for living standards, except where societies have chosen to deny the benefits to large segments of their populations.  Both domestically and internationally we have every opportunity to do this right.  We can either organize our economy–and the world order–so that all can benefit, or we can go down in flames of our own making.

A Nightmare World of Our Making

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“presidential Twitter” by osipovva is licensed under CC BY 2.0

The first Democratic debate began with a question to Warren about the economy: “Since most Americans think the economy is doing fine, why do you need all those plans for change?”  She responded by pointing out that the “great” economy was primarily benefiting only a lucky few.

Even that, however, understates the issue.  It’s not just that unemployment rates don’t tell the whole story about what it means to be working for a living.  It’s that there is so much run amok with the direction of the country that the unemployment rate doesn’t begin to stand-in for the strength of the economy or the well-being of the country overall.

For that we need to pull together many strands and formulate a picture what it would mean to have four more years of Trump—the kind of world we are making.  This note attempts to make a start.  We can be explicit about many things.  Our path of decline was clear from early on, but now we have more specifics.  We should leave no doubt about the risks we run.

In doing this, one goal is to avoid what I felt was a problem with the Clinton campaign.  Trump kept talking about change, but we didn’t get across the danger in those changes: what they would mean for ordinary daily life, for the environment, for the courts, for democracy in America.  Who’s to say if that would have made a difference, but many people were certainly surprised by what they got.  If nothing else, it would have called out the risk of non-voting.

What follows is an outline with a few supporting points and references.  As noted this is a start.

More unprecedented floods, hurricanes, temperatures, etc.

By leaving the Paris agreement we broke the international unanimity that was the best chance for progress.

               Each lost year is time we won’t get back

Disdain for science and technology in government

Non-support of research and education

Ignoring climate change technologies

Choosing big, established companies over innovators (Net Neutrality)

Xenophobia and racism encourage entrepreneurs to go elsewhere

=> Lower standard of living

=> Real threat to our military security

  • Nuclear proliferation and risk of nuclear terrorism

Encouraging nuclear proliferation by statements and actions (N. Korea vs Iran)

More players means more chance of theft or sale

Belligerence normalizes nuclear weapons

Bulletin of the Atomic Scientist sees highest risk of catastrophe ever

  • Back to the 19th century on woman’s rights

Roes vs Wade hangs by the thread of Roberts’ desire for Court legitimacy.

One more Supreme Court vacancy, and we all live in Alabama.

  • Erosion of opportunities for middle class life

Education—weakening of public education and more generations in debt

Attacks on unions

Healthcare at issue—ACA hobbled with no other proposal in view

Continued declines in good jobs for people without degrees

No recognition of the problems created by technology change

Cutting the safety net—If you don’t succeed you’re a loser

Conflicts stoked between races, ethnic groups, cultures

No interest in racial justice—to the detriment of all

Cruel and intentionally divisive Immigration policy

Major hit to both security and prosperity

Trade wars instead of alliances and international norms

New arms race already announced

Policy rooted in weakness—from fighting on all fronts

Conflict as the first choice— “Trade wars are easy.”

Other wars too?

  • Weakened environmental and other standards

Air and water

Workplace safety

Food safety

  • Bubble economy based on debt

Good times prolonged by deficit-funded stimulus

Proven recipe for cycles of boom and bust (back to the 19th century here too)

No Republican history of help during downturns

  • Undermining of democracy in the US

Increasing government by fiat (“executive order”)

Restriction of voting rights

Politicization of the Justice Department

=> Democracy is not a luxury—it made us what we are.

 

Weakness and Strength

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“King of Hearts” by Duong Vu licensed under CC BY-NC 4.0

We’ve talked here before about effects of bullying.  This time we want to be even more basic—weakness and strength.

If you want to get something done, it’s important to get others behind you.   In almost any task or context, few people are able simply to impose their will.  Building alliances is the means to power—for individuals and for countries.

There was a time after the second world war when the US, as last unscathed power, could do whatever it wanted.  That’s of course the era Trump recalls with MAGA.  But we’re no longer in that world, and we do ourselves no favor by pretending it’s still true.

Krugman had a recent NYTimes piece talking about the limits to our power in the trade wars.  However to my mind he didn’t go far enough with his argument.  It’s true that our power is limited, but we also refuse to think seriously about how to get things done.

China is of course the case in point.  Despite Trump’s initial declaration that “trade wars are easy”, this one has been up and down for many months with constant chest-beating and accusations of evil.  There is still no clear idea of the timetable or eventual conclusion.  One thing that is certainly true is that there is already a legacy of hostility and suspicion on both sides—with consequences that will survive any deal.

That situation is not a fact of life, it’s a fact of weakness.  We represent 18% of China exports, and by going it alone that’s all the leverage we’ve got.  The EU represents another 18% with essentially the same grievances.  Normal behavior is to ally our interests and get to the conclusion with overwhelming power.  The Business Roundtable of Corporate CEO’s recognized that from the beginning.   However, Trump wanted a special deal with his name on it, so he chose weakness instead of strength—leaving us all to live with it.

We can even go a step farther.  As a way of exercising power, international institutions are actually useful for this kind of problem.  That’s why, despite the “threats to our sovereignty” rhetoric, those institutions exist.

China is still classified as a developing country for the WTO. Everyone expected that to change, with new rules to be negotiated. That is where the US + EU leverage would normally be brought to bear.

And negotiation in that context has two more advantages:

1. First the negotiation becomes a matter of standards for international behavior, not a question of national honor. That keeps the focus on technical issues rather than face-saving.

2. It requires us to separate what are real matters for rules of commerce (open markets, intellectual property, conditions for labor) from whatever barriers we might want to place in the way of Chinese technological development.

That may sound like a limitation, but it is actually an advantage.  It makes us think about competition for what it is, rather than as something we can cure with a big stick.  There is plenty that we’re not doing to strengthen our own act.

The bottom line here is simple.  We have chosen to fight a trade war with China out of weakness.  That weakness has already had consequences in terms of relations between countries and will also be expressed in the terms of any final agreement.

We can be explicit about what that means.  We have chosen a path that will lead to less access to the Chinese market (already the biggest economy in the world) and more hostility between countries.  On that second point we have already announced a new arms race—which will cost both countries (and the rest of the world economy) dearly.

None of this has to be.   It’s weakness instead of strength.

The Tariff Tax

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As many economists have noted, tariffs are not a sneaky way to get free money from foreigners.  They are a tax paid by all of us in higher prices, and that’s exactly what has happened with the Trump tariffs to date.

Since a tariff is a tax, it’s worth thinking about what kind of a tax it is.  We’ll be specific.

For this note we’ll restrict ourselves to the two biggest ones:  the new Chinese tariff of 25% on $250 B of annual inputs and the new Mexican tariffs, scheduled (as Trump says) to reach 25% on all Mexican imports ($346 B annually) by October.  This costs a total of .25 x ($250 B + $346 B) = $149 B annually.

At first glance this doesn’t seem too bad, since aggregate annual income in the US is $13T, and $149 B /$13 T is about 1%.  But that’s the wrong comparison.  The primary impact here is on prices, which means we’re talking about consumptionnot income.  This is like a sales tax.   Consumption is much more evenly distributed than income, so lower incomes pay more.

It is a truism that the rich spend less of their income, because they don’t have to.  But in fact we can be specific.  Even if we throw out the highest 5% of incomes, the income distribution in this country is more than 3 times more inequitable than the consumption distribution.  What’s more, the US Bureau of Labor Statistics publishes a breakdown of consumption spending by decile segments of US income.  That is, for each 10% segment of the population—ordered by income—they give a percentage of total consumption spending.  These ten slowly-increasing percent values give a quantitative picture of what it means to say the rich spend less of their income:

4.1, 4.5, 6.1, 7.0, 7.8, 9.0, 10.5, 12.1, 15.1, 23.7

Going back to the $149 B of tariffs, this tells us how those tariff costs are allocated to the different segments of the population:  4.1 % to the lowest tenth of income, 4.5 % to the next tenth, and so forth.  Further, since the total number of households in the country is 141 million, we can even say something about how much households in each segment will actually have to pay.  For the lowest segment this is

$149 B x (0.04) / 14.1 M = $433

The calculation is the same for each segment, using the percent values just listed.  In addition the Labor Statistics figures also include the average income level associated with each population segment.  That lets us directly compare Trump’s much-touted tax cuts with tariff costs.  Putting it all together we get the following chart

Population segment Percent of consumption Average income Tariff cost Tax cut
1 4.1 $6,000 $433 0
2 4.5 $16,000 $475 $50
3 6.1 $25,000 $644 $180
4 7.0 $35,000 $738 $360
5 7.8 $45,000 $824 $570
6 9.0 $60,000 $951 $870
7 10.5 $75,000 $1110 $1310 (combined in source)
8 12.1 $100,000 $1268
9 15.1 $130,000 $1596 Not in source
10 23.7 $250,000 $2504 Not in source

What we see is that the Chinese and Mexican tariffs alone overwhelm the Trump tax cuts for 60% of the US population (and come close for another 20%).

Conclusion:  Tariffs are a serious and regressive tax.  Since they are also an expensive and uncertain way to create jobs (at $800-900K each), this is no silver bullet.  And that’s before we even think about retaliation.

For Sanity on China

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What are our stated objectives with China?

  • We want to bring them into the world economic system on appropriate terms of fair play.
  • We want access to their markets according to those rules of fair play.
  • We want protection for our businesses and workers, also according to those rules of fair play.

Those are perfectly normal and achievable objectives.  We can be specific about how to get there, and the probability of success is high.

What are our actual objectives in the trade war?

Trump has been clear about this in both words and deeds.  Our trade war is to assure that China will never be able to challenge our technological, economic, and military dominance.

Those are not the same as the stated objectives (although the press seems confused about the difference).  They are objectives for a real war.  And if you’re going to fight a real war—with bullets or with tariffs—you had better be sure you’re going to win, or the results won’t be pretty.

Problem #1:  We don’t run the world.  We are 18% or Chinese exports, same as the EU.  We’ve gone out of the way not to have an alliance with the EU on this issue.  (It’s worth noting that the EU already has a far lower balance of payments deficit with China than we do.)  The Chinese domestic economy is already larger than ours.  We can inflict pain, but we can’t put them out of business.

Problem #2:  China’s technological and military strength is not just because they’re stealing from us.  That genie is already out of the bottle, and it is an imperialist delusion to believe we can keep them poor and dumb.

Problem #3:  We’ve converted an issue of international good behavior into a matter of domination.  Without boots on the ground there’s no way in hell we’re going to enforce an agreement of subjugation.  (The distinction is not a gray area—we’re either thinking about rules we’d be willing to apply to ourselves or not.)

What’s going to happen?

The Chinese will go build their (very large) part of the world without us.   We will have no effective access to their markets or their technology (already today technology is a two-way street).  We’ll be back in a cold war with all that entails in risk, mutual hostility, military spending, and stunted world growth.

What should we do?

  1. The first step is to cool the chest-beating jingoism. (China is in fact a mixed bag for the US economy.) That way we can at least recognize the difference between the two types of objectives.  It’s the only way to behave rationally.
  2. If what we want is a correct and viable world order, then that means we need an alliance supporting our view. Ultimately this should end up in the WTO, but a first step is to codify what we want and assemble wide support.  That will add both carrot and stick to achieve our objectives.  The Business Roundtable of corporate CEO’s was explicit about this from the beginning.
  3. History shows that the best way to avoid war is mutual commerce. That means establishing rules we can all abide by.
  4. If we’re worried that the Chinese are going to take over anyway, then the best thing to do is to recognize and play to our strengths. Overall the odds are well in our favor.   The fact is that we’ve been here before.  Not so many years ago the perceived technology threat was Japan.  In China, Xi’s thirst for control makes him an enemy of what made for China’s success.

History is full of disastrous, inconclusive wars that no one wins.  Trade wars too.  We’re not so weak that we have to blunder our way into this one.